Tax Type
Corporation Income Tax
Description
Federal limitation on taxation of interstate commerce; Sales of computer hardware and software
Topic
Constitutional Provisions
Date Issued
03-17-1993
March 17, 1993
Re: Ruling Request: Nexus
Dear*********
This will reply to your letter dated November 4, 1992, sent on behalf of an anonymous taxpayer. You asked the Department to consider whether the taxpayer's sales and solicitation activity in the Commonwealth of Virginia would subject the taxpayer to Virginia income tax.
FACTS
The taxpayer, headquartered in Massachusetts, sells computer software, hardware, and maintenance contracts in Virginia. Orders for these products are approved in another state. No office or place of business is maintained in Virginia.
Customers can either (i) order new stand-alone software or updates, installing the software themselves, or (ii) purchase the computer hardware and software together, in which case the taxpayer installs the software before shipment. Under either purchase option, the purchased item is shipped to Virginia via common carrier.
The taxpayer sends an employee to Virginia to install the equipment, test the system (including the software), and hold a training seminar for the customer's employees on site.
The taxpayer also sells maintenance contracts to customers in Virginia. All maintenance is conducted via a modem originating from Massachusetts. The taxpayer's employees do not physically enter Virginia to perform maintenance services.
RULING
Based upon the facts presented, the taxpayer has sufficient nexus with the Commonwealth of Virginia to subject it to Virginia income tax.
Sales Activities: Software and Hardware
Public Law ("P.L.") 86-272, codified at 15 U.S.C.A. §381, prohibits Virginia from imposing an income tax on the taxpayer "if the only business activities within [Virginia] by or on behalf of [the taxpayer] during [the] taxable year are ..." the solicitation of orders for the sale of tangible personal property. Although P.L. 86-272 only applies to "tangible" personal property, Virginia applies the same "solicitation" test to intangible personal property. Thus, if the taxpayer's only activities in Virginia were the missionary work by its sales staff and the resulting sale of its products to purchasers in Virginia the taxpayer would be exempt from Virginia income tax, even though it clearly has income from Virginia sources. However, the facts as presented exceed solicitation as defined in P.L. 86-272.
The taxpayer's actions following product delivery, such as installing equipment, testing systems, and holding training seminars are neither ancillary to the solicitation of sales nor de minimis in nature. Rather, such activities serve a business function apart from soliciting sales. See Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 112 5. Ct. 2447 (1992).
Maintenance Contracts
Virginia income tax is imposed on corporations with a positive property, payroll, and/or sales factor. See Virginia Regulation § 630-3-302 (copy enclosed). Thus, the rendering of services via a modem located outside Virginia, absent a positive factor, is not sufficient nexus to subject the taxpayer to Virginia tax. However, as discussed above, the taxpayer's other activities are sufficient to subject it to Virginia income tax.
Accordingly, the taxpayer has income from Virginia sources and is required to file Virginia income tax returns for all years in which it has conducted business in Virginia as described.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6558L
Rulings of the Tax Commissioner